The Bank of England today made a dramatic move to buoy up confidence following last week's tragic events - announcing a surprise 0.25% cut in interest rates.

The move, which will bring the cost of borrowing to the lowest for nearly 40 years, is the first time the Bank of England's Monetary Policy Committee has cut rates outside its scheduled meetings.

Interest rates are now at 4.75%, marking a return to the low rates not seen since the 1960s.

The last time rates were lower than 5% was at the beginning of 1964 - when rates were held at 4% for more than a year from January 3 1963, before being raised on February 27 1964 to 5%, the Bank of England said.

The move also comes hot on the heels of yesterday's action by the US's Federal reserve to slash interest rates by half a point, an hour before the New York Stock Exchange reopened for the first time since last week's tragedy.

Other banks around the world had swiftly followed suit, with the European Central Bank also cutting rates by half a percentage point, as did the central banks of Canada, Switzerland and Sweden.

But questions were being asked last night as to why the Bank of England -known affectionately in the City as the Old Lady - had not also moved rapidly to cut rates.

The bank had been the only central bank from the Group of Seven industrialised countries - besides Japan - that had not cut rates and traders and brokers were on the edge of their seats waiting for a decision.

However some said the Bank, which was given the power to set rates in 1997, had not wanted to surprise the markets, with some thinking the ECB's move had caught it unawares.

TUC general secretary John Monks said: 'There is a real risk of worldwide economic slowdown, which is why this cut is absolutely vital.

'Co-ordination must now continue and the Bank and the Government must stand ready for further action.'

In a statement the Bank of England said a special meeting of the Monetary Policy Committee was convened this morning by the Governor, at which the committee voted to reduce the rate by 0.25%.

It said: 'The committee considered the reaction of financial markets to the tragic events of last week: it considered the Federal Reserve's decision to reduce rates yesterday, and the response of other central banks to that move.

'Falls in stock markets around the world, and the likely impact on confidence, suggest a weaker outlook for global activity than appeared likely at the committee's meeting earlier this month.

'It is too early to make an informed judgment about the scale of the impact on the UK economy.

'But the direction of that impact and the associated risks are clear.

'The committee decided that an immediate reduction of interest rates was therefore, appropriate.

'The committee will have an opportunity at its scheduled meeting in October to assess more fully the impact of recent events and the prospect of meeting the inflation target in the medium term.'

Roger Lyons, general secretary of the Manufacturing Science and Finance union, said: 'This is very welcome. It will ease the pressure on manufacturing industry, although more action may be needed.'

Philip Shaw, economist at Investec, said: 'The bank's cut in interest rates today is very welcome. It clears up the uncertainty about the MPC's intention today.'

The London stock markets however was little changed on the decision, and was down more than 100 points at 4788.2 following the move.

Neil Parker, market strategist at Royal Bank of Scotland, said the markets were slightly disappointed by the cut given that the European Central Bank and the US Federal Reserve had lowered their rates by 50 basis points.

He added, however: 'They have left the door open to cut again in October. It is not terrible news and in the fullness of time they will make another 25 basis point cut.

'They have made it fairly clear in what they said that they want to fully assess the impact of events in the US. They are going to wait a couple of weeks to see how markets and confidence reacts.'

John Butler, economist at HSBC, added that going for a 0.25% cut rather than a 0.50% reduction showed the Bank of England's Monetary Policy Committee was concerned about stoking inflationary pressure in the UK economy.

Official figures today showed inflation soared to its highest rate for more than two years last month and above the Chancellor's target at 2.6%.

Mr Butler said: 'It's symbolic, probably needed given what may happen to the global economy but at the same time signals they have on eye on domestic demand.'

The British Chambers of Commerce applauded the decision saying it would shore up confidence.

A spokesman said: 'Given the fragile state of the global economy and the uncertainty ahead this signal of resolve should be welcomed.'

The Engineering Employers Federation said it was disappointed the Bank of England did not cut rates by more.

A spokesman added: 'We fail to see why the bank has been so conservative and not followed the lead of other central banks and cut rates by half a point.

'We feel there is room for a half-point cut and we will be pressing for a further cut in two weeks time.'

Chancellor Gordon Brown welcomed the 'decisive action' by the Bank of England to cut interest rates.

'It is part of our determination, not just that we will never succumb to terrorism, but that we will maintain the conditions, as far as we can, for stability and growth in the world economy,' he told the ITV1 Lunchtime News.

Chancellor Mr Brown acknowledged that they were 'testing times' for the global economy, but said there was a determination around the world to maintain financial stability.

'I think the combination of getting the markets moving yesterday, which was a great tribute to New York and the American financial community, working with oil producers - because in previous instances oil prices have been a major source of problems - and now with these interest cuts around the world we are showing that we can take decisive action and we have taken that decisive action,' he said.

'That is not to say that things are not difficult because there will be an impact on the airlines, on the insurance industry and everything else, but we are showing our resolve to maintain the conditions.'

The Chancellor also promised 'decisive action' on money laundering and on seizing the financial assets of terrorists.

'In every area where we can work together with our neighbours around the world we will be taking action,' he said.

The CBI applauded the Bank of England's decision.

Digby Jones, director-general, said: 'This was a decisive and proportionate move that will help support business and market confidence at an uncertain time for the world economy.

'Fundamentals affect economies in the medium term, not events. The underlying stability of the UK economy will have been further strengthened by this move.

'Even before last week's appalling tragedy, it was clear the risks to growth were spreading to parts of the service sector, despite strong spending on the high street.

'The Bank has taken out further insurance against worsening global pressures.'